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EU: Proposals for taxation of digital businesses

EU: Proposals for taxation of digital businesses

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As noted in an EC release, digital businesses—including social media companies, collaborative platforms, and online content providers—have contributed to economic growth in the EU. Current tax rules, however, were not designed to consider companies that are global, virtual or have little or no physical presence. Hence, two legislative proposals are being put forward to provide for “fairer taxation of digital activities” in the EU:

Reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels

Impose an interim tax that would cover the main digital activities that currently escape tax altogether in the EU

Reform the EU's corporate tax rules for digital activities

This proposal would enable EU Member States to tax profits that are generated in their territory, even if a company does not have a physical presence within the country. The new rules would aim for online businesses to contribute to public finances at the same level as traditional brick-and-mortar companies. Under the proposal, a digital platform would be deemed to have a taxable “digital presence” or a virtual permanent establishment in an EU Member State if it satisfies one of the following criteria:

A threshold of €7 million or more in annual revenues in a EU Member State

More than 100,000 users in a EU Member State in a tax year

Over 3,000 business contracts for digital services between the company and business users in a tax year

The new rules also would affect how profits are allocated to EU Member States to better reflect how companies can create value online (for example, depending on where the user is based at the time of consumption).

As the EC release explains, the new system would provide “a real link” between where digital profits are made and where they are taxed, and the measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) (the EC’s proposed initiative for allocating profits of large multinational groups to reflect where the value is created).

Interim tax on certain revenue from digital activities

The proposed interim tax would provide that activities that are currently not “effectively taxed” would begin to generate immediate revenues for EU Member States. This could help avoid unilateral measures to tax digital activities in certain EU Member States and avoid a patchwork of national responses. This indirect tax would apply to revenues created from certain digital activities that currently escape tax. This system would apply only as an interim measure, until the comprehensive reform would be implemented. There would be mechanisms to alleviate the possibility of double taxation.

The interim tax would apply to revenues created from certain activities such as revenues:

Created from selling online advertising space

Created from digital intermediary activities that allow users to interact with other users and that can facilitate the sale of goods and services between them

Created from the sale of data generated from user-provided information

Tax revenues would be collected by the EU Member States where the users are located, and would only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million.

What’s next?

The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation.

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